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February 5, 2013

Pension Funds Sue BlackRock on iShares Revenues

Two unions accuse the firm of burdening them with excessive fees and systematically violating its fiduciary duties

A pair of middle-American pension funds have launched a lawsuit against BlackRock (BLK), claiming that the company had systematically "looted" the proceeds from money they had invested in the company's iShares ETFs.

According to Reuters and Bloomberg, the suit was filed on behalf of the Laborers' Local 265 Pension Fund of Cincinatti and the Plumbers and Pipefitters Local No. 572 of Nashville, claiming that several of the iShares investments spent their money on "grossly excessive compensation" to agents associated with the ETFs.

The suit claims that BlackRock breached its duties as part of those transactions and asks for funds to be recovered for the pension fund investors.

The company's iShares ETFs "systematically violated their fiduciary duties, setting up an excessive fee structure designed to loot securities lending returns properly due to iShares investors," according to documentation in the suit, filed last month in the Middle District Court of Tennessee.

The funds claim that 40% of the securities lending revenues from the ETFs go to fund managers. BlackRock has countered, saying the complaint is invalid and that it will "contest it vigorously."

BlackRock spokeswoman Caroline Hancock told Reuters that part of the iShares program's success—having brought in $36 billion in new business in the fourth quarter—is its internalized operation structure.

"To achieve this, we run the program ourselves while bearing all the costs, rather than outsourcing to third parties as others do," she said.